COMPENSATION

ADMINISTRATION
EXCEL BOOKS
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16
Chapter
ANNOTATED OUTLINE
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INTRODUCTION
Compensation is what employees receive in exchange for their contribution
to the organization. Generally speaking, employees offer their services for
three types of rewards
Base pay
Variable pay
Benefits
Compensation Administration
The most important objective of any pay system is fairness or equity, generally
expressed in three forms
Internal equity: where more difficult jobs are paid more
External equity: where jobs are fairly compensated in comparison to
similar jobs in labour market
Individual equity: where equal pay is ensured for equal work
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Objectives of compensation planning
Attract talent
Retain talent
Ensure equity
Reward appropriately(loyalty, commitment, experience, risk raking and other
desired behaviours)
Control costs
Comply with legal rules
Ease of operation
Compensation Administration
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Equity And Pay Rates
Equity in pay rates could be achieved through five steps
Compensation Administration
Ensuring equity in pay rates
Find the worth of each job through job evaluation
Conduct a salary survey through the following methods
Key job matching
Key class matching
Occupational method
Job evaluation method
Broad classification method
Group similar jobs into pay grades(pay grades are groups of jobs within a
particular class that are paid the same rate
Price each pay grade by using wage curve(curve in a scatter diagram
representing the relationship between relative worth of jobs and wage rates)
Fix a pay rage for each grade (like pay for officer category I, II, III etc)
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Components of Pay Structure
The two essential components of pay structure are; basic wages and
dearness allowance .the basic wage rate is fixed taking the skill
needs of the job, experience needed, difficulty of work, training
required, responsibilities involved and the hazardous nature of the job.
Dearness allowance it paid to employees in order to compensate
them for the occasional or regular rise in the price of essential
commodities.
Compensation Administration
Components of pay structure in India
Under the Workmen's Compensation Act
Wages for leave period, holiday pay, overtime pay, bonus, attendance bonus
and good conduct bonus
Under the Payment of Wages Act
Retrenchment compensation, payment in lieu of notice , gratuity payable on
discharge
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The following, however, do not come under the term wages
Bonus
Payments made under a profit sharing scheme
Value of house accommodation
Medical allowances
Travelling allowances
Any other sum paid to defray special expenses incurred by
the worker
Contribution to pension, provident fund
Any amenity or service excluded from the computation of
wages
Compensation Administration
Components of Pay Structure
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It is the process of managing a companys compensation (base
compensation as well as supplementary) programme Base
compensation, here, refers to monetary payments to employees in
the form of wages and salaries. It is a fixed, non-incentive kind of
payment calculated on the basis of time spent by an employee on
the job. Supplementary compensation signifies incentive payments
based on the actual performance of an employee.
Compensation Administration
Wage And Salary Administration
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Objectives
To establish a fair and equitable remuneration
To attract competent personnel
To retain present employees
To control labour cost
To improve motivation and morale of employees
To project a good image of the company
Compensation Administration
Wage And Salary Administration
Principles
Wage and salary plans be sufficiently flexible
Job evaluation being done scientifically
Wage and salary plans be always consistent with overall
plans
Wage and salary plans being responsive to changing
conditions
Factors affecting compensation
levels
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Compensation Administration
Factors influencing compensation levels
Job needs
Ability to pay
Cost of living
Prevailing wage rates
Unions
Productivity
State regulation
Demand and supply of labour
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Compensation Administration
Wage Policy In India
A wage policy offers certain guidelines for determining a wage
structure. The term wage structure refers to various pay scales
showing rages of pay within each grade. Three important elements of
wage policy in India need to be elaborated here
Minimum wage: Wage sufficient to sustain and preserve the
efficiency of the worker and offer basic amenities of life
Fair wage: It is above the minimum wage but below the living
wage. It is fixed, taking into account factors such as the
productivity of labour, prevailing wage rates, level of national
income and its distribution, the employers capacity to pay etc.
Living wage: This is the highest amount of wages proposed by
the government, offering basic amenities of life and satisfying
the social needs of worker.
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Compensation Administration
State regulation of wages
Institutions involved in fixation of
wages

Employer
Collective Bargaining
Legislation Minimum Wages Act
Wage Boards Payment of Wages Act
Pay Commissions Adjudication Machinery
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Compensation Administration
Wage differentials
Differences in wage rates are inevitable in any industry and the
reasons are fairly obvious
Reasons for wage differentials
Wage differentials Reasons
Interpersonal differentials Differentials in sex, skills, age, knowledge, experience
Inter-occupational differentials Varying requirements of skill, knowledge, demand-supply situation
Inter-area differentials Cost of living, ability of employers to pay, demand and supply situation, extent
of unionisation
Inter-firm differentials Ability of employer to pay, employees bargaining power, degree of
unionisation, skill needs, etc.
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Compensation Administration
Choices In Designing A
Compensation System
The compensation that is followed by a firm should be in tune with
its own unique character and culture and allow the firm to achieve
its strategic objectives. A variety of choices confront a firm here:
Internal and external pay
Fixed vs. variable pay
Performance vs. membership
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Compensation Administration
Guidelines for effective performance
based pay stems
To be fair to employees, organisations should keep the following guidelines in mind
while instituting merit-pay systems
Establish high standards of performance, so that only the truly outstanding
employees emerge as winners.
Develop accurate performance appraisal systems. The focus must be on job-
specific, results-oriented criteria as well as employee behaviours.
Train supervisions in the mechanics of carrying out appraisals and offering
feedback to employees in a proper way.
Tie rewards closely to performance.
Use a wide range of increases. Also, make pay increases meaningful.
Choices In Designing A
Compensation System
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Compensation Administration
Suitability of job based vs. knowledge
based pay systems
A job based-pay system is suitable
when:
Jobs do not change often
Technology is stable
Lot of training is required to learn a
given job
Turnover is relatively how
Employees are expected to move
up through the ranks over time
Jobs are fairly standardised within
the industry
Individual-based pay system is suitable
when:
The firm has relatively educated
employees with both the ability and
willingness to learn different jobs
The firm's technology, processes are
subject to frequent change
Vertical growth opportunities are
limited
Opportunities to learn new skills
exist
Teamwork and employee
participation are encouraged
Job vs. individual pay
Choices In Designing A
Compensation System
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Compensation Administration
Broad banding vs. Competency
based pay system
Organisations that follow a skill-based or Competency Based Pay System frequently
use broad banding to structure their compensation payments to employees. Broad
branding simply compresses many traditional salary grades (say 15 to 20 grades)
into a few wide salary bands (three or four grades). By having relatively few job
grades, this approach tries to play down the value of promotions. Depending on
changing market conditions and organisational needs, employees move from one
position to another without raising objectionable questions, (such as when the new
grade is available, what pay adjustments are made when duties change etc.) As a
result movement of employees between departments, divisions and locations
becomes smooth. Employees with greater flexibility and broader set of capabilities
can always go in search of jobs in other departments or locations that allow them to
use their potential fully. Broad banding, further, helps reduce the emphasis on
hierarchy and status. However, broad banding can be a little unsetting to a new
recruit when he is made to roll on various jobs. Most employees still believe that the
existence of many grades helps them grab promotional opportunities over a period of
time. Any organisation having fewer grades may be viewed negatively as having
fewer upward promotion opportunities. Moreover, a number of individuals may not
want to move across the organisation into other areas.
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Compensation Administration
Below market vs. above market compensation
Open vs. secret pay
Choices In Designing A
Compensation System
Managerial Compensation In India
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Compensation Administration
Executive compensation is built around three factors in India
Job complexity
Employers ability to pay
Managerial productivity
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Compensation Administration
Executive compensation: Private
sector vs. Public sector
In a well publicised front page news sometime back The Economic Times mentioned
about the miserable salary levels of top executives in public sector units in India. For
example the State Bank of India chief is paid 10% of HDFC Bank Managing Director,
BHEL's chief getting about Rs.10 to 12 lakhs per year as against ABB's MD getting
nearly Rs.40 to 50 lakhs; Indian Oil Corporation's chief getting Rs.10 to 15 lakhs per
annum as against Reliance Industries' Ambanis getting a package of over Rs.10 crore
per annum. Salary levels in 'hot' private sector such as BPO, hospitality,
biotechnology 'Media', IT, Telecommunications, Oil, Automobiles and Insurance are
way above the packages offered to executives in public sector for various reasons
such as: overstaffing, inefficient processes, pressure on margins due to competition,
appointment of people without requisite skills at the top level, political interference
especially in pricing the products or services, legal constraints etc.
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Compensation Administration
How to retain talent?
Improving communication
Changing work rules
Increasing pay and incentives
Ego massaging services
Non-poaching agreements
Opportunities to upgrade skills and knowledge
Offering jobs with stretch, pull and challenge